Influence costs and hierarchy

Roman Inderst, Holger Müller () and Karl Wärneryd

Economics of Governance, 2005, vol. 6, issue 2, 177-197

Abstract: In an internal capital market, individual departments may compete for a share of the firm’s budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more opportunities for exerting influence. The unique influence-cost minimizing hierarchy is strongly asymmetric. With a linear production technology this is also the optimal hierarchy. If individual departments have different productivities, however, and the production technology exhibits decreasing returns to scale, a symmetric hierarchy that does not minimize influence costs may be optimal. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Hierarchies; influence activities; internal capital markets (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Influence Costs and Hierarchy (2000)
Working Paper: Influence Costs and Hierarchy (2000)
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DOI: 10.1007/s10101-004-0084-8

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